There is no doubt that non-profit organisations (NPOs) provide essential social services. Their work benefits the most vulnerable within our society, their presence is desperately needed and their combined humanitarian services change people’s lives and help to build better communities.
While there may be consensus about why NPOs are needed, there seems to be less unanimity between donors and NPOs regarding the use of funds to make the most impact. NPOs often hear from donors that they don’t want to fund ‘boring’ overhead / general expenses. They want to fund ‘exciting’ and ‘attractive’ projects. So, NPOs change how they operate to attract or accommodate the donor, in order for them to survive, since the funding power dynamics lean strongly towards what the donor wants, rather than what the organisation needs. NPOs are often constrained from doing great work because of donor demands for specific projects (restricted funding).
Donors are usually not in favour of their funds being spent on operational costs such as salaries, electricity, rent, fuel and so on, and that more should be spent on the ‘actual cause’ or specific programmes. NPOs argue that funding of general expenditure is vital for programmes to work effectively and to make a real and meaningful difference.
The work that FoodForward SA does is a good example. With our foodbanking model, all the food is donated by major retailers, wholesalers, and manufactures, while we need funding to cover the operational costs of sourcing, collecting, sorting and storage of this donated surplus edible food, which is then distributed to hundreds of beneficiary organisations across South Africa.
Since the retail value per kg of donated food is R46,25, the value of each meal (consisting of 300 grams) is R13,87. Yet, it only requires a donation of R1,08 to facilitate the provision of this meal, ensuring that donor funds supporting this model is well spent, and more cost effective than paying large sums of money to buy food, which is very expensive.
There is an opportunity for both the donor and NPO to develop a partnership where there is mutual understanding for where funds should be spent and what the return on investment for the donor would be. There is an opportunity for NPOs and donors to think differently about charity. Here are a few suggestions:
For NPOs:
- Communicate Better
NPOs should be upfront and communicate what exactly funds will be allocated to and how beneficial it will be for the cause as a whole. It is important to illustrate how funding operational costs contribute to keeping the wheels turning, and without such funding, would stifle the growth of the organisation.
- Act Responsibly
Ensure that every cent donated is spent comprehensively to achieve optimal success, makes the most impact and engenders trust.
For Donors:
- Trust Your Non-profit
Before declining a request for funding, consider all factors, such as the impact the organisation has on its beneficiaries, whether they practice good governance and also investigate their spending tendencies. Most times, donors will find that the organisation is well equipped to use funds in the most effective manner.
- Think Differently About Overhead Expenses
The good work carried out by the organisation is only possible because of the people that work to make a difference, and therefore, funding salaries is not a negative thing, but in fact is essential. Without fuel for trucks, FoodForward SA would not be able to collect food for distribution to those who need it most, so how can funding this operational cost not be seen as mandatory for donors who want to truly help an organisation prosper and make a greater impact. Funding overhead expenditure is funding the cause. If general expenses make the pie bigger, then it is justifiable spending.
Dan Palotta, owner of a US based consulting firm focuses on assisting NPOs grow and offer insights to influence how donors and NPOs think. He suggests that causes should function more similarly to for profit companies and recommends that we think differently about the following:
- Compensation:
For Profit Companies: The more value you offer, the more money is offered.
NPOs: Are expected to give the most value, but get the least compensated. He suggests that NPOs pay more attractive salaries in order to attract the right expertise and value to the sector.
- Advertising:
For Profit Companies: Spend more to increase your reach.
NPOs: Get advertising donated and don’t spend donated funds on advertising.
- Raising Revenue
For Profit Companies: They take risks and some don’t work out. That is acceptable.
NPOs: If they take risks and fail, they are considered irresponsible. This stifles innovation.
- Time
For Profit Companies: It sometimes takes years before they turn a profit.
NPOs: If they don’t make an immediate return, they are condemned. Some worthy causes and projects require years to get the desired results.
- Profit
For Profit Companies: The more profits are made, the more risk they can take.
NPOs: Should not make a profit and are therefore starved for growth and disadvantaged.
If NPOs are to survive the tough economic climate, be in a solid position to accommodate for an increased demand for their service offering, and grow, they will need to change the way they think and how they function. Similarly, donors should follow a more partnership approach, understand the dynamics in NPOs and discuss how best to use the funds. That way everyone wins – especially those who are being served by the cause.
Andy Du Plessis
Managing Director